How Financial Reform Aims to Protect Consumers

Unsafe consumer loans for mortgages and credit cards were at the heart of the financial crisis. Banks handed out loans to people who couldn't afford them. The banks ended up with trillions in bad debt.

The financial overhaul being crafted by House-Senate negotiators would tighten protections for consumers. It would create a regulator to oversee financial products and services such as mortgages, credit cards and auto loans. The regulator is intended to make those products safer and easier to understand.

Here are some questions and answers about the legislation's consumer protection authority:

Q: How would it better protect consumers?

A: The new regulator would write and enforce rules for financial services and products. It might outlaw confusing fine print on credit agreements, for example. It could ban mortgages it considered unsafe.

The regulator would exist in an independent bureau within the Federal Reserve. Its authority would be limited: Other regulators could vote to block its rules.

Still, the regulator would have broad authority. It would oversee companies such as mortgage lenders, which haven't faced meaningful federal regulation. Those companies made some of the highest-risk loans before the financial crisis. The new authority is designed to close that loophole by regulating all financial products — regardless of who offers them.

Yet there are many exceptions. Small banks would not face on-site investigation by the regulator. Some auto dealers and pawn brokers would be exempt from its oversight under one proposal being debated.

Q: How would the new regulator affect financial institutions?

A: Many would face an extra layer of oversight. They would be monitored by the consumer agency as well as by their existing regulator.

The current system relies on several bank regulators. Each oversees a category of companies. The new regulator would be different: It could monitor any financial company that serves consumers — unless Congress exempts that type of company.

So some companies that weren't regulated before, such as payday lenders, would be subject to oversight by the consumer agency.

Q: How would the agency directly affect ordinary people?

A: Mainly, it would aim to ensure that credit card companies and mortgage lenders don't abuse consumers. It would monitor documents that cover mortgages and credits cards to ensure they aren't misleading or confusing. But the new regulator's approach would be defined over the years by the presidential appointees who run it.

Q: Where does the bill stop short?

A: The agency would have little direct power over small banks, retailers, pawn brokers or auto dealers that offer bank loans. It could write rules that affect them. But regulators would enforce those rules. And the agency wouldn't police companies regulated by the SEC. Those include stock brokers and credit rating agencies.

Business groups such as the U.S. Chamber of Commerce lobbied against the agency and persuaded lawmakers to shield some companies from its oversight. The House bill exempts insurers and auto dealers that offer bank loans, among others. The Senate bill exempts small businesses but would regulate car dealers.

Critics say these exemptions mean the agency wouldn't prevent another crisis. The next financial threat, after all, could emerge anywhere. The savings and loan crisis of the 1980s and 1990s involved lending by smaller banks, not Wall Street giants.

Unsafe consumer loans for mortgages and credit cards were at the heart of the financial crisis. Banks handed out loans to people who couldn't afford them. The banks ended up with trillions in bad debt.The financial overhaul being crafted by House-Senate negotiators would...